Project On Audit Committee: Origin and Evoluation of Auditing

Project on Audit Committee
INTRODUCTION
The audit of banking companies plays a very important role in India as it help to
regulate the banking companies in right manner. In audit of banks includes
various types of audit which are normally carried out in banking companies
such as statutory audit, revenue/income expenditure audit, concurrent audit,
computer and system audit etc. the above audit is mainly conducted by the
banks own staff or external auditor. However, the rules and the regulation
relating to the conduct of various types of audit or inspections differ from a
bank to bank expect the statutory audit for which the RBI guidelines is
applicable. In this, I have given more importance on the overall bank audit
system. In todays competitive world audit is very much necessary as well as
compulsory , because investor investing decision is depend on that particular
concept if auditor has expressing his view about particular organization is true
and fair then investor can get his ideas about how much he should invest in
particular companies.
ORIGIN AND EVOLUATION OF AUDITING

1) Origin of term :
The term audit is derived from the Latin term audire mean to hear. In early
days, an auditor used to listing to the account read out by the accountant in
order to check them.
2) Ancient origin :
Auditing is as old as accounting. It was in use in all ancient countries such as
Mesopotamia, Egypt, Greece, Rome, U.K., and India. The Vedas,Ramayana,
Mahabharata contain references to accounting and auditing. Arthashasastra by
Kautilya gives detailed rules for accounting and auditing of public finances. The
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Mauryas, the Guptas and the Mughals had developed and accounting and
auditing system to control state finances. Thus, basically, accounting and
auditing had their origin in the need for the government to control the income
and expenditure of the state and the army. The original object of auditing was to
detect and prevent errors and frauds.
3) Compulsory audits of companies:
With increasing number of companies, the companies acts in different countries
began providing for compulsory audit of accounts of companies. Thus U.K.
audit of accounts of limited companies became compulsory in 1900. In India,
the companies act, 1913 made audit of company accounts compulsory. With
increase in size of companies, the object of audit also shifted to ascertaining
whether the accounts were true and fair rather than true and correct. Thus,
the emphasis was not arithmetical accuracy but on fair representation of
financial affairs.
4) Development of accounting and auditing standard:
The international accounting standards committee and the accounting standards
board of institute of chartered accountant of India have developed standard
accounting and auditing practices to guide the accountants and auditor in their
day-to-day work.
5) Computer technology:
The latest development in auditing pertains to the use of computers in
accounting as well as auditing.Really, auditing has come a long way from
hearing the accounts in the ancient day to using computers to examine
computerized accounts of today.
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DEFINITION OF AUDITING
Various persons such as the owners, shareholders, investors, creditors, lenders,
government etc. use the final account of business concern for different purposes.
All these users need to be sure that the final accounts prepared by the
management are reliable. An auditor is an independent expert who examines the
accounts of a business concern and reports whether the final accounts are
reliable or not. Different authorities have defined auditing as follows.
Mautz define the auditing as auditing is concerned with the verification of
accounting data, with determining the accuracy and reliability of
accounting statement and reports.
International auditing guidelines defines the auditing as auditing is an
independent examination of financial information of any entity with a view
to expressing an opinion thereon.
BASIC PRINCIPAL OF AUDITING:

1) Integrity, objectivity and independence:
The auditor should be honest and sincere in his audit work. He must be fair and
objective. He should also be independent.
2) Confidentiality:
The auditor should keep the information obtained during audit, confidential. He
should not disclose such information to any third party. He should, keep his
eyes and ears open but his mouth shut.
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3) Skill and competence:
The auditor should have adequate training, experience and competence in
Auditing. He should have a professional qualification ( i.e. be a Chartered
Accountant) and practical experience. He should be aware of recent
developments in the field of auditing such as statement of ICAI, changes in
company law, decisions of courts etc.
4) Working papers:
The auditor should maintain working papers of important matters to prove that
audit was conducted with due care according to the basic principles.
5) Planning:
The auditor should plan his audit work. He should prepare an audit programmed
to complete the audit efficiently and in time.
6) Audit evidence:
The report of the auditor should be base on evidence obtained in the course of
audit. The evidence may be obtained through vouching of transactions,
verification of assets and liabilities, ratio analysis etc.
7) Evaluation of accounting system and internal control:
The auditor should ensure that the accounting system is adequate. He should see
that all the transaction have been properly recorded. He should study and
evaluate the internal controls.
8) Opinion and report:
The auditor should arrive at his opinion on the account based on the audit
evidence and submit his report. The opinion may be unqualified, qualified or
adverse. The audit report should clearly express his opinion. Law should require
the content and form of audit report.
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AUDIT COMMITTEE
In pursuance of RBI circular September 26, 1995, a bank is required to
constitute an Audit Committee of its Board. The membership of the audit
committee is restricted to the Executive Director, nominees of Central
Government and the RBI, Chartered Accountant director and one of the nonofficial directors.One of the functions of this committee is to provide direction
and oversees the operations of the total audit function in the bank. The
committee also has to review the internal inspection function in the bank, with
special emphasis on the system, its quality and effectiveness in terms of follow
up. The committee has to review the system of appointment and remuneration
of concurrent auditors.The audit committee is, therefore, connected with the
functioning of the system of concurrent audit. The method of appointment of
auditors, their remuneration and the quality of their work is to be reviewed by
the Audit Committee. It is in this context that periodical meeting by the
members of the audit committee with the concurrent auditors help the audit
committee to oversee the operations of the total audit function in the bank.
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ADVANTAGES OF AUDITING
1) Assurance of true and fair accounts:Audit provides an assurance to the
various users of final accounts such as owners, management, creditors,
lenders, investors, governments etc. that the accounts are true and fair.
2) True and Fair balance sheet:The user accounts can be sure that the assets
and liabilities shown in the audited balance sheet show the concern, as it is
i.e. neither more nor less.
3) True and fair profit and loss account:The user can be confident that the
audited profit and loss account shows the true amount of profit or loss as it is
i.e. neither more nor less.
4) Tally with books:The audited final account can be taken to tally with the
books of accounts. Thus, the income-tax officer can start with the figure of
audited books profit, make adjustments and compute the taxable income. An
outside user need not go through the entire books.
5) As per standard accounting and auditing practices:The audited final
accounts follow the standard accounting and auditing principles laid down
by professional bodies. Thus, audited accounts are based on objectives
standard and not on personal whims and fancies of a particular accountant or
auditor.
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STAGES IN AUDITING
1) Preliminary work:
a) The auditor should acquire knowledge of the regulatory environment in
which the bank operates. Thus, the auditor should familiarize himself
with the relevant provisions of applicable laws and ascertain the scope of
his duties and responsibilities in accordance with such laws. He should be
well acquainted with the provisions of the Banking Regulation act, 1956
in the case of audit of a banking company as far as they relate of
preparation and presentation of financial statements and their audit.
b) The auditor should also acquire knowledge of the economic environment
in which the bank operates. Similarly, the auditor needs to acquire good
working knowledge of the services offered by the bank. In acquiring such
knowledge, the auditor needs to be aware of the many variation in the
basic deposit, loan and treasury services that are offered and continue to
be developed by banks in response to market conditions. To do so, the
auditor needs to understand the nature of services rendered through
instruments such as letters of credit, acceptances, forward contracts and
other similar instruments.
c) The auditor should also obtain and understanding of the nature of books
and records maintained and the terminology used by the bank to describe
various types of transaction and operations. In case of joint auditors, it
would be preferable that the auditor also obtains a general understanding
of the books and records, etc, relating to the work of the other auditors, In
addition to the above, the auditor should undertake the following:
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2) Evaluation of internal control system:
It may be noted that transaction in banks are voluminous and repetitive, and fall
into limited categories/heads of account. It may, therefore, be more appropriate
that the evaluation of the internal control is made for each class/category of
transaction. If the exercise of internal control evaluation is properly carried out,
it assist the auditor to determine the effectiveness or otherwise of the control
systems and accordingly enable him to strengthen his audit procedures, and lay
appropriate emphasis on the risk prone areas. Internal control would include
accounting control administrative controls.
a) Accounting controls:
Accounting controls cover areas directly concerned with recording of
financial transactions and maintenance of such registers/records as to ensure
their reliability.
Internal accounting controls are also envisaging such procedures as would
determine responsibility and fix accountability with regard to safeguarding
of the assets of the bank. It would not be out of place of mention that there is
a distinction between accounting system and internal accounting controls.
Accounting system envisages the processing of the transaction and events,
their recognition, and appropriate recording. Internal controls are techniques,
method and procedures so designed and usually built into systems, as would
enable prevention as well as detection of errors, omissions or irregularities in
the process of execution and recording of transaction/events.
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3) Preparation of audit programme for substantive testing and its
execution
Having familiarized him the requirements of audit, the auditor should prepare
an audit programme for substantive testing which should adequately cover the
scope of his work. In framing the audit programme, due weightage should be
given by the auditor to areas where, in his view, there are weaknesses in the
internal controls. The audit programme for the statutory auditors would be
different from that of the branch auditor. At the branch level, basic banking
operation are to be covered by the audit. On the other hand, the statutory
auditors at the head office (provisions for gratuity, inter- office accounts, etc.).
The scope of the work of the statutory auditors would also involve dealing with
various accounting aspects and disclosure requirements arising out of the branch
returns.
4) Preparation and submission of audit report
The branch auditor forwards his report to the statutory auditors who have to
deal with the same in such manner, as they considered necessary. It is desirable
that the branch auditors reports are adequately in unambiguous terms. As far as
possible, the financial impact of all qualification or adverse comments on the
branch accounts should be clearly brought out in the branch audit report. It
would assist the statutory auditors if a standard pattern of reporting, say, head
wise, commencing with assets, then liabilities and thereafter items related to
income and expenditure, is followed.
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BOOKS OF ACCOUNTS OF BANKS
A banking company is required to maintain the books of accounts in accordance
with sec.209 of the companies act. There are, however, certain imperatives in
banking business they are the requirements to maintain accurate and always up
to date account. Banks, therefore, device their accounting system to suit these
requirements. The main characteristics of a banks system of book keeping are as
follows:entries in the personal ledgers are made directly from vouchers instead
of being posted from the books of prime entry.
The vouchers entered into different personal ledgers each day are summarized
on summery sheet; the totals of each are posted to the control accounts in the
general ledger.
The general ledger trail balance is extracted and agreed every day.All entries in
the detail personal ledgers and the summary sheet are check by person other
than those who have made the entries, with the general results that most clerical
mistakes are detected before another day begins.
A. A trial balance of the detailed personal ledgers is prepared
periodically, usually every two weeks, and agreed with the general
ledger control accounts.
B. Expecting for cash transactions, always two vouchers are prepared
for each transaction, one for debit and the other for credit. This
system ensures double entry at the basic level and obviates the
possibility of errors in posting.
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PRINCIPAL BOOKS OF ACCOUNT
General ledger:
It contains control accounts of all personal ledgers, the profit and loss
account and different assets and liabilities accounts. There are certain
additional accounts known as contra accounts, which is unique feature of
bank accounting. These contra accounts are maintained with a view to
keeping control over transactions, which have no direct effect on the banks
positions.
For e.g. letter of credit opened, bills received for collection, guarantee is
given etc.
Profit and Loss ledgers;
Some banks keep one account for profit and loss in this general ledger and
maintained separate books for the detailed accounts. These are columnar books
having separate columns for each revenue receipt and expense head. Other
banks keep separate books for debits and credits posted are entered in to the
profit and loss account in the general ledger.
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VERIFICATION OF ASSETS AND LIABILITES
Capital and Liabilities:
1) Capital
The following particulars have to be given in respect of share capital in the
balance sheet
For nationalized banks
The capital owned by central government as on the date of balance sheet
including contribution from government, if any, for participation in world bank
project should be shown.
For banks incorporated outside India
Capital (the amount brought in by banks by way of start up capital as prescribed
by RBI shown under this head)
Amount of deposit kept with RBI under section 11(2) of the banking regulation
act, 1949.
For other banks
Authorized capital
(shares of Rs.each)
Issued capital
(-do-)
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Subscribed capital
(-do-)
Called-up capital
(-do-)
Less: calls unpaid

Add: forfeited shares
The auditor should verify the opening balance of capital with reference to the
audited balance sheet of the previous year. In case there has been increase in
capital during the year, the auditor should examine the relevant documents
supporting the increase. For example, in case of an increase an authorized
capital of a banking company, the auditor should examine the special resolution
of shareholders and the memorandum of association. An increase in subscribed
and paid-up capital of a banking company, on the other hand, should be verified
with reference to prospectus/ other offer document, reports received from
registers to the issue, bank statement, etc.
2) Reserves and surplus:
The following are required to be disclosed in the balance sheet under the head
Reserves and Surplus.
a) Statutory reserves.
b) Capital reserves.
c) Share premium.
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d) Revenue and other reserves.
Other current liabilities:
The third schedule to the banking Regulation act, 1949, requires disclosure of
the following items under the head other liabilities and provision
Bills payable
Inter office adjustments.
Interest accrued
Other (including provisions)
The auditor may verify the various items under the head other liabilities and
provision in the following manner.
Bills payable
Bills payable represent instrument issued by the ranch against money received
from customers, which are to be paid to the customers or as per his order. These
include Demand Draft, Telegraphic Transfer, and Mail transfer and Mail
Transfer, Traveller cheques, Pay order, Banker cheques, and similar instrument
issued by the bank but not presented for payment until the balance sheet date.
Inter office adjustment:
The balanced in inter office adjustment account, if in credit, is to be shown
under this head.
Interest accrued:
Interest accrued but not due on deposit is to be shown and borrowing is to
shown under this head. The auditor should examine this with reference to terms
of various type of deposits and borrowings.
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ASSETS:
Cash, bank balanced and money at call and short notice:
The third schedule to the Banking Regulation act, 1949, requires following
disclosure to the be made in the made in the balance sheet regarding cash,
balances with Reserve Bank of India., balance with other bank, and money at
call and short notice.
Cash and balance with Reserve Bank of India.
I. Cash in hand (including foreign currency notes)
II. Balance with Reserve Bank of India
e) In current account
f) In other account
Balanced with banks money at call and short notice
I. In India
A) Balanced with banks
1. In current account
2. In other deposits account.
B) Money at call and short notice
1. With banks
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2. With other institutions
Cash Reserved:
One of the determinants of cash balance to be maintained by banking companies
and other schedule is the requirement for maintenance of certain minimum cash
reserve. While the requirement for maintenance of cash reserve by banking
companies is contained in the banking regulation act,1949 corresponding
requirements for schedule bank is contain in the Reserve Bank of India.
Statutory liquidity ratio:
Section of 24 the act requires that every banking company shall maintain in
India in cash, gold or unencumbered approved securities an amount which shall
not, at the close of business on any day, be less than twenty five percent, or such
other percentage not exceeding forty, as the RBI bank form time to time, of total
demand and time liabilities in India as on last Friday of the second preceding
fortnight.
Deposits by foreign banking company:
Section 11(2) of the act requires the banking companies incorporated outside
India to deposit with RBI certain amount either in cash or in unencumbered
securities or partly in cash and partly in such securities.
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2) Advances:
In carrying out of audit of advances, the auditor of advances, the auditor is
primarily concerned with obtaining evidence about following
a) Amount included in balance sheet in respect of advances are

outstanding at the date of balance sheet.
b) Advances represent amount due to the bank.
c) There are no unrecorded advances.
d) The stated basis of valuation of advances is appropriate and
properly applied, and that the recoverability of advances is
recognized in their valuation.
e) The advances are disclosed, classified and describe accordance
with recognized accounting policies and relevant statutory and
regulatory requirements.
f) The auditor should ascertain the statues of balancing of subsidiary
ledger relating to advances.
g) The auditor should review the operation other advances accounts.
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TYPE OF AUDIT IN BANK
Statutory audit:
The statutory audit, which is compulsory as per the law. The statutory audit of
banks includes examination and inspection of internal audit, concurrent audit,
etc. The statutory audit of banks is like a post mortem activity. The suggestions
of the statutory auditors can assist the bank management in improving the
effectiveness of internal audit/concurrent audit/inspection functions, etc. In this
way statutory plays a very important role in regulating the banking companies.
Internal audit:
Banks generally have a well-organized system of internal audit. There internal
auditors pay frequent visit to the branches. They are an important link in
internal control of the bank. The systems of internal audit in different banks also
have a system of regular inspection of branches and head office. A separate
department within the banks by firms of chartered accountants carries out the
internal audit and inspection function.
Concurrent audit:
Concurrent audit is the system which introduced by the RBI with the view that
interval between the occurrence of transaction and its over view kept to the
minimum extent and examination of transactions by the auditors take place as
soon as the transaction take place. It has perceived the effective means of
control. The main view of concurrent auditors is to see that the transactions are
properly recorded, documented and vouched.
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System audit:
In todays technological advancements, banking companies are using a wellorganized computer system to perform their transactions. So, it is very
necessary to conduct system audit in order to evaluate the computer system for
effectiveness.System audit is the audit of such computer environment/system
and comprises the following internal controls over EDP activities and with
application
controls
specific
control
procedures
over
accounting
applications/assuring that all transaction are recorded and authorized and

completely, accurately, timely processed manner which in turn are verified by
computer.
Revenue audit:
Revenue audit refers to the audit of revenues/ incomes. In revenue audit of
banking companies, auditors go through the various sources of revenues from
which bank earn income. In revenue audit of banks, the auditor inspects that all
the records are showing true and fair picture of revenues or not.
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CONCLUSION
The project the position of Indian banking system as well as the principal laid
down by the Basel Committee on banking supervision. This assessment was
done in seven major areas, which are core principals, concurrent audit, internal
audit, deposit, loan accounting and transparency and foreign exchange
transaction. The project concluded that, given the complexity and development
of Indian banking sector, the overall level of compliances with the standards and
codes is of high order. This project gives the correct ideas about how the major
areas can be found by way of effective auditing system i.e. errors, frauds,
manipulations etc. form this auditor get the clear ideas how to recommend on
the banks position. Project also contain that how to conduct of audit of the
banks, what are the various procedure through which audit of banks should be
done. Form auditing point of view, there is proper follow up of work done in
every organization whether it is banking company or any other company or any
other company there no misconduct of transactions is taken places for that
purpose the auditing is very important aspect in todays scenario form company
and point of view.
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Project on Audit Committee

ORIGIN AND EVOLUATION OF AUDITING